Recently I gave a lecture at Seton Hall University entitled, "Is Socially Responsible Investing Investing Responsibly?" Here are the highlights, along with my take on socially responsible investing.
But first, what is socially responsible investing (or SRI)?
SRI is commonly known as an approach to investing that focuses on businesses that can deliver both a good financial rate of return and a return for the "greater good."
, a mutual fund company that specializes in SRI, defines SRI as "an investment strategy that integrates social or environmental criteria into financial analysis."
Some (but not all) social responsible investors avoid businesses involved in "destructive" products such as alcohol, tobacco, gambling and weapons. Meanwhile, others who subscribe to SRI will proactively attempt to modify corporate behavior to conform to more "responsible" standards. For example, in
, several shareholder proposals concerning environmental issues were submitted to all XOM shareholders for consideration. (They were all voted down.)
The opposite of SRI is often called "sin" investing. Sin investors focus on investing in businesses behind such activities as drinking (alcohol), smoking and gambling -- to name a few.
So is SRI investing responsibly, and is there nothing redeeming aboutsin investing?
The answer is really a matter of perspective. Let me give you the example I posed to my audience at Seton Hall.
Suppose that a pharmaceutical company -- let's call it Drugex -- developed a cure-all for cancer. This new drug would eliminate all forms of cancer known and unknown. It is the perfect drug. When I asked the audience if they would invest in this company there was affirmative unanimity in their response.
Next I added a few facts. Drugex was also a manufacturer and distributor of birth-control products. The company uses the profits and cash flow generated from the sale of those products to perform theresearch and development for the new cancer cure. Then I asked the audience, "
would Drugex fit your personal SRI portfolio?" The responses were mixed.
Conversely, we had to question potential conflicts when it comes to investing in so-called sins.
Assume you could invest in a winery. By the strictest definition of SRI, this company would be considered a sin investment and would be excluded from your portfolio. However, if I told you that this winery not only produces wine for consumers but also produces and donates wines for religious ceremonies, would that be considered SRI or sin?
The bottom line: I believe that socially responsible and/or sin investing is in the eyes of the investor. Each of us has to decide what is socially responsible and what is not. And for all investors,what should ultimately matter is performance.
As I outlined in "
FiveInvesting Tips I Learned at the Track
," a key to investing is learning to eliminate stocks that will underperform the market rather than concentrating on stocks that will outperform the market.
SRI eliminates stocks from the pool of stocks or other assets available for investment without regard to potential return. As such, the investor or money manager may be restricted to a population ofstocks that may yield substandard returns vs. the broad market or a specific benchmark.
Several studies have been performed attempting to measure the performances of SRI and sin portfolios vs. those of benchmark indices. However, frankly, I think there is no conclusive evidencethat SRI or sin investing outperform the market or any benchmarks. I believe that the drawback in such studies may be due to the subjectivity in defining what is SRI or sin investing (as I describedabove).
Still, I have found a few Web sites that are worth looking at if you're interested in SRI. The first is KLD Research & Analytics (
kld.com), which providesSRI resources and has developed several SRI-based indices. The secondsite is the one for Calvert Investments (
calvert.com), whichprovides SRI mutual funds. Lastly, there is the site for the SRI-devoted trade organization the Social Investment Forum (
A Viable Alternative
Let me propose a potential solution for individuals who desire to promote socially responsible behavior or financially support a better world. Rather than invest in socially responsible companies, I suggest investing without restriction in order to maximize your returns. Then donate your investment gains to organizations that promote the cause or causes of your choice. For example, use your investment income to donate to behavioral treatment programs, cancer research or alternative energy.
If you want to give back to society or the environment throughinvesting consider one of the following approaches:
- Invest in a SRI fund. Seek out the fund with the best track recordand management team.
- Create a charitable trust that will earmark investment income tobenefit a socially responsible cause. My wife and I have such a trust. If you're interested in taking this route, you may want to refer tothe Planned Giving Design Center at pgdc.com.
At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at
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